Differences between Chapter 7 and Chapter 13 Bankruptcy

By: Williamblake
When bankruptcy becomes a necessity because of a bad financial situation, an individual will have to determine whether they should file for Chapter 7 or Chapter 13 bankruptcy. Understanding the differences between them is very important because they are separate and unique filings.

Chapter 7 bankruptcy is the one that most people seek to file. When a person files for bankruptcy under Chapter 7, their assets are liquidated to pay what is owed to the creditors. The courts decide on a reasonable amount for payment based on individual circumstances.

One hundred percent of the person's assets will not liquidated. In some cases, people who file for Chapter 7 bankruptcy are able to keep their home and car. The liquidation process is based off of specific state laws.

In October 2005, the laws concerning Chapter 7 bankruptcy were changed. Now, there are tests that have to be passed in order to file for Chapter 7 bankruptcy. A person's income must be lower than the determined median income for the state in which they reside. Also, a person must not have the assets available to pay at least twenty-five percent of their debt owed in order to qualify to file under Chapter 7.

Testing associated with Chapter 7 bankruptcy can be overridden if a special situation presents itself. This occurred after Hurricane Katrina. Individuals who lost everything they had as a result of this disaster were allowed to have a fresh start. If, after the testing process, you are denied the right to file for Chapter 7 bankruptcy, you can make an appeal to the court, but, because of extra travel and expense, this is not always the most advantageous course of action.

Chapter 13 bankruptcy involves repayment of the debt owed to creditors. You are given a time frame to pay off your debt and means are developed for you to do so. The assets that you own are not liquidated. The courts look at your finances and determine what you can reasonably afford to pay back to the creditors.

Under the new bankruptcy laws, this process is a little different. The court used to decide what expenses where necessary for you to pay and what were not. Necessary expenses where things like rent/mortgage, groceries, utilities, and so forth. Under the new law, a formula developed by the IRS determines this.

Credit counseling sessions must be attended by anyone who wants to file for bankruptcy before the government will allow them to do so. The government does not want anyone to make a hasty decision to file for bankruptcy and is trying its best to stop people from taking advantage of the system by hiding assets. For example, assets acquired just before the application process began can be non-exempted or liquidated by the government.

Bankruptcy proceedings are very serious and you should know which chapter you choose to file under and why before beginning the process. Be warned, bankruptcy lawyers are now charging more for their services since the filing process has become more complicated because of recent changes in the law.
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